Understanding and Reporting the Tax Consequences of Cancellation of Debt Income

Size: px
Start display at page:

Download "Understanding and Reporting the Tax Consequences of Cancellation of Debt Income"

Transcription

1 MSP #3 Understanding and Reporting the Tax Consequences of Cancellation of Debt Income Responsible Officials Richard J. Byrd, Jr., Commissioner, Wage and Investment Division Chris Wagner, Commissioner, Small Business/Self-Employed Division Definition of Problem The National Taxpayer Advocate, in her 2007 Annual Report to Congress, identified the tax consequences of cancellation of debt income as one of the most serious problems encountered by taxpayers. 1 The rules that determine whether cancellation of debt income is includible in gross income are complex. There are several exceptions to the general rule of includibility, such as the exception for debt canceled when a homeowner becomes unable to make payments on a loan secured by his or her principal residence under the Mortgage Forgiveness Debt Relief Act (MFDRA). 2 The requirements for reporting excluded amounts are also complex, and taxpayers often do not receive reliable information about their tax reporting and payment obligations concerning cancellation of debt income. For example, the New York Times described the operation of MFDRA as follows: Suppose a buyer defaults on a $220,000 mortgage. The bank forecloses and sells the house in today s battered market for $180,000. The $40,000 of remaining debt is discharged. Under previous law, the $40,000 was considered income and was subject to taxation. Under this law, the tax obligation is forgiven. 3 According to the Fort Worth Star-Telegram: In tax law, the amount of forgiven debt is typically treated as income and is taxed. But to help people who are affected by the mortgage crisis, Congress excluded homeowners whose mortgage debt was forgiven in years 2007, 2008 and Keep good records, and keep track of the amount that the bank wrote off. 4 These newspaper accounts are not inaccurate, but they fail to mention two important points. First, even though qualified principal residence indebtedness under MFDRA includes most home loans whether they resulted from a refinancing transaction, a second mortgage, or a home equity line of credit, the fact that the canceled debt is a home loan does not mean the MFDRA exception applies. The exception does not cover loan proceeds used for any purpose other than to acquire or improve a principal residence. 5 As described 1 National Taxpayer Advocate 2007 Annual Report to Congress This problem ranked second among the 26 most serious problems addressed. 2 Pub. L. No (2007). 3 Jan M. Rosen, New Rules Ease the Sting of Mortgages, The New York Times, Feb. 10, Vicki Lee Parker, McClatchy Newspapers, Tax Tips for Dealing with Turbulent Markets, Fort Worth Star-Telegram, Sept. 28, Pub. L. No (b)(2007). Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 39

2 Appendices below, many homeowners used a portion of their home loans to pay off medical bills, student loans, or other expenses. These canceled debts are not excludible from income under MFDRA (although they may be excludible under a different exception). Second, neither homeowners nor any other debtors who exclude cancellation of debt from income automatically receive the benefit of the exclusion. To claim the exclusion, taxpayers are required to file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) with their tax returns. 6 If they fail to file Form 982, the IRS will assume the cancellation of indebtedness income is taxable. 7 In recognition of the seriousness of the problems taxpayers face in reporting cancellation of debt, the National Taxpayer Advocate makes a Recommendation in this year s Annual Report to Congress suggesting three options that would make it easier for financially distressed taxpayers to exclude cancellation of debt from gross income. 8 Analysis of Problem Background According to RealtyTrac, one in every 475 U.S. housing units received a foreclosure filing in September [of 2008]. Foreclosure filings were reported on 765,558 U.S. properties during the third quarter, up more than three percent from the second quarter and up 71 percent from the third quarter of In response to this foreclosure crisis, Congress extended MFDRA, which was originally set to terminate on December 31, 2010, through The rise in foreclosures has taken place against a backdrop of increasingly risky loan practices. In recent decades, an increasing number of housing loans were made by lenders specializing in subprime lending. 11 Subprime loan originations reached $160 billion in 1999, representing 12.5 percent of total originations. 12 According to a Department of Housing and Urban Development and Department of Treasury Task Force on Predatory Lending report, The primary purpose of over 50 percent of first lien subprime mortgages and up to 75 percent of second lien subprime mortgages is debt consolidation and/or general consumer credit, not home purchase, home improvement or refinancing the rates and terms 6 IRS Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, 4-7 (2007). 7 Id. at 3 (2007). The IRS is notified that a debt has been canceled by means of Form 1099-C, Cancellation of Debt, issued by creditors who forgive a debt of $600 or more. 8 See Recommendation, Simplifying the Tax Treatment of Cancellation of Debt Income, infra. 9 Press Release, RealtyTrac, Foreclosure Activity Decreases 12 Percent in September, at ChannelID=9&ItemID=5299&accnt=64847 (Oct. 23, 2008). 10 Emergency Economic Stabilization Act of 2008, Pub. L. No , Department of Housing and Urban Development and Department of the Treasury Task Force on Predatory Lending, Curbing Predatory Home Mortgage Lending 28 [hereinafter Treasury-HUD Report], at (2000). 12 Id. at

3 of a mortgage. 13 Borrowers 65 years of age or older were three times more likely to hold subprime mortgage loans than borrowers under Of the subprime loans that were second lien mortgages, 45 percent of the loans were used for debt consolidation, 30 percent for medical, education and other expenses, and 25 percent for home improvement. 15 In the majority of loans, a portion of the proceeds was still being used to cover living expenses and pay other non-mortgage debt such as credit cards in 2001 and early 2002, as shown below: 16 CHART 1.3.1, Use of Funds from Refinancings, 2001 and 2002 Repayments of Other Debts 51% Home Improvements 43% Consumer Expenditures 25% Stock Market, Real Estate or Taxes 22% Percentages add up to more than 100 because each refinancing loan could have been used for multiple purposes. Source: Federal Reserve System, Flow of Funds Accounts of the United States. From 1992 to 2001, the level of credit card debt among seniors between 65 and 69 years old increased by 217 percent. 17 With virtually all medical expenses now payable by credit card, there is evidence to suggest that deductibles, co-pays, dental and vision care, prescription drugs and other uncovered costs played a significant role in the increased credit card balances of many older Americans Id. at Neil Walters and Sharon Hermanson, Subprime Mortgage Lending and Older Borrowers, AARP, at aresearch-import-182-dd57.html (March 2001). 15 Treasury-HUD Report at Javier Silva, A House of Cards: Refinancing the American Dream, at (2005). Percentages are based on number of loans issued and not on loan amounts. 17 Heather C. McGhee & Tamara Draut, Retiring in the Red: The Growth of Debt Among Older Americans 3, at pdf (2004) (percentage based on 2001 dollars). 18 Id. at 6. Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 41

4 Appendices According to the New York Times, after years of flooding Americans with credit card offers and sky-high credit lines, lenders wrote off an estimated $21 billion in bad credit card loans in the first half of If unemployment continues to increase, debt cancellation could exceed historic norms. 20 Cancellation of this debt does not qualify for exclusion from income under MFDRA, and using home loan proceeds to pay this debt disqualifies canceled loans for exclusion under MFDRA. Taxpayers need to be able to determine whether their canceled debt is excludible from income under a different exception (such as the insolvency exception) and must file Form 982 to claim the benefit of that exception. Developments Since the 2007 Annual Report to Congress The 2007 Annual Report recommended changes to various aspects of the reporting process to make it easier for taxpayers to understand their obligations in reporting cancellation of indebtedness income. The report recommended that the IRS: Develop a comprehensive publication that would assist taxpayers in preparing returns; Provide in-person assistance to taxpayers who seek information or return preparation assistance; Improve the form used by lenders to report cancellation of indebtedness income and the form used by taxpayers to report reductions in tax attributes; and Improve its communications with taxpayers who it believes misreported cancellation of indebtedness income. We commend the IRS for taking the steps described below that improved the availability of reliable information and assistance to taxpayers, and for working with the office of the National Taxpayer Advocate to address our concerns. New Publication 4681 Provides Better Information to Taxpayers The National Taxpayer Advocate strongly recommended that the IRS develop a publication on the tax treatment and reporting of cancellation of indebtedness income that consolidates all relevant information in one place. 21 The IRS developed Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, in collaboration with the Taxpayer Advocate Service and released it in May The publication fills a critical 19 Eric Dash, Consumers Feel the Next Crisis: It s Credit Cards, The New York Times, Oct. 29, Id. 21 National Taxpayer Advocate 2007 Annual Report to Congress

5 information gap, because it provides an exhaustive explanation of cancellation of indebtedness issues. 22 The Taxpayer Advocate Service (TAS) Raised Awareness about Cancellation of Debt As part of the 2008 IRS Nationwide Tax Forums, held in six major cities (Atlanta, Chicago, Orlando, Las Vegas, New York, and San Diego), TAS developed and presented a training session entitled Cancellation of Debt What You Need to Know. The session was designed to raise awareness of the issue among practitioners and to provide guidance for them. It opened with a video podcast showing the National Taxpayer Advocate describing cancellation of debt income and how this issue affects taxpayers. The session proceeded in a panel format with a TAS executive serving as moderator, a TAS attorney or systemic advocacy analyst sharing the TAS perspective, a representative from the Wage and Investment (W&I) division Automated Underreporter (AUR) unit describing how the IRS handles Forms 1099-C, and a local Low Income Taxpayer Clinic (LITC) staff member discussing the impact of cancellation of debt income on taxpayers and practitioners. This session proved extremely popular, attracting standing room only crowds at all of the first three Tax Forums. The Atlanta and Chicago presentations drew more than a thousand attendees. In each of the final three locations, the session was presented twice to accommodate everyone who wished to attend, and attendees were given the new Publication 4681 as a reference document. The IRS Revised Form 982 The National Taxpayer Advocate noted in the 2007 Annual Report that The IRS could substantially simplify the task of completing the form [Form 982] for non-business taxpayers by clarifying the instructions. 23 In 2008, the IRS, in collaboration with TAS, revised Form 982 and the instructions to incorporate the MFDRA provisions (and other statutory provisions pertaining to Hurricane Katrina) and to provide clarification. The revised instructions include a detailed chart that guides taxpayers to the appropriate lines on the form. The taxpayer sees a column captioned IF the discharged debt you are excluding is with a menu of different types of debt (qualified principal residence indebtedness, nonbusiness debt, or any other debt). Each category of debt on the menu corresponds to a column captioned THEN follow these steps The steps explain exactly which lines on the form to complete. 22 In July 2008, the National Taxpayer Advocate awarded the National Taxpayer Advocate award to TAS and other IRS and Chief Counsel employees who worked on the new Publication. The National Taxpayer Advocate Award is conferred on IRS employees who make extraordinary contributions in support of the following TAS strategic objectives: advocate changes in tax law or procedures that protect taxpayer rights, reduce taxpayer burden, and improve IRS effectiveness; improve TAS s ability to identify and respond to taxpayer concerns; identify significant sources of TAS casework and work with operating divisions on strategies to reduce inappropriate TAS workload; and ensure the human resources component of TAS is adequate to meet its workload demands. 23 National Taxpayer Advocate 2007 Annual Report to Congress 23. Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 43

6 Appendices The revised Form 982 is a substantial improvement over the previous version, although it does not reference Publication 4681 because the publication was issued later. As described below, further changes in Form 982 are desirable. The IRS Revised Form 1099-C Form 1099-C, Cancellation of Debt, is used by lenders to report cancellation of indebtedness. 24 Lenders issued Forms 1099-C to over 1.4 million taxpayers in 2006 and to more than 1.6 million taxpayers in In 2006, over 15 percent of the taxpayers issued a 1099-C received more than one, but on only two percent of the Forms 1099-C did the issuer check the box to indicate the debt was discharged in bankruptcy. 26 The 2007 Annual Report to Congress noted that although taxable cancellation of indebtedness income does not arise if the underlying debt is nonrecourse, there is no difference in the way canceled recourse debts and canceled nonrecourse debts are reported on Form 1099-C. 27 Form 1099-C also did not instruct the issuer to provide its telephone number, which made it more difficult for a debtor who disagrees with the amount recorded by the issuer as the fair market value of the property (or with any other aspect of the form) to communicate with the issuer to resolve the problem. The IRS revised Form 1099-C in 2008 to include the field Was borrower personally liable for repayment of the debt? and to instruct the issuer to provide its telephone number. The reverse side of the 1099-C, which contains Instructions for Debtor, was changed to incorporate references to Publication The National Taxpayer Advocate applauds the IRS for making these improvements and looks forward to continued collaboration with the IRS in further refining and developing Form 1099-C and instructions. The IRS Expanded Assistance to Taxpayers In her 2007 report, the National Taxpayer Advocate noted that the IRS designated the tax treatment of canceled debt a subject that is out of scope for tax return preparation assistance at Volunteer Income Tax Assistance (VITA) sites, Tax Counseling for the Elderly (TCE) sites, and at the IRS s own Taxpayer Assistance Centers (TACs). 28 She recommended that the IRS designate the tax treatment of canceled debts as in scope for purposes of preparing returns and answering general questions at the TACs. She further recommended that the IRS provide specialized training on cancellation of indebtedness issues to a unit of telephone assistors and then route taxpayer calls on these issues to those assistors Treas. Reg P-1(a)(1). 25 Lenders issued Forms 1099-C to 1,452,393 taxpayers in 2006 and to 1,635,820 taxpayers in IRS Compliance Data Warehouse, Individual Returns Master File (Tax Years 2005, 2006). 26 IRS Compliance Data Warehouse, Individual Returns Master File (Tax Year 2006). 27 National Taxpayer Advocate 2007 Annual Report to Congress Id. at Id. at

7 The IRS removed the out of scope designation at VITA and TCE sites with respect to the MFDRA exception for cancellation of debt income. Volunteers who staff these sites may now assist taxpayers in determining whether the MFDRA exception applies to them. However, training at VITA and TCE sites appears to incorporate Publication 4702, Mortgage Forgiveness Debt Relief Act of 2007, which is inadequate and out of date. We recommend that the IRS develop better training materials for VITA and TCE sites, confirm that VITA and TCE volunteers who staff these sites can spot potential application of other exceptions to cancellation of debt income, and refer taxpayers who visit VITA and TCE sites to TACs or LITCs, as appropriate. The IRS also removed the out of scope designation at the TACs, and is providing more extensive training on cancellation of debt income for some TAC employees. Senior staff began training in November 2008 to be qualified to assist taxpayers with this issue by January 2, 2009, when the new filing season begins. As of December 15, 2008, 277 employees certified that they received such training. The printed training materials cover the insolvency and bankruptcy exceptions for cancellation of debt income, but not the exceptions for qualified farm indebtedness or qualified real property business indebtedness (these exceptions continue -- we believe, appropriately -- to be designated out of scope ). 30 The materials explain the meaning of insolvency and state Note: Advise the taxpayer to attach a statement to their return explaining how they arrived at their insolvency amount. This could be done by listing all their assets in one column and liabilities in another. 31 The materials include several examples from the new Publication 4681, as well as a glossary of terms and training on how to complete Form The printed training materials will be used in conjunction with an interactive electronic assistance program that was also recently developed and is scheduled to be launched in January The software, referred to as ITLA (Interactive Tax Law Assistant), is organized as an interview in which the taxpayer (through the IRS employee) answers a series of questions that lead to a conclusion and a recommended course of action. Although one of the ITLA questions is Were you insolvent at the time the debt was canceled? the assistor is cautioned, Note to Assistor: do not assist taxpayer with the insolvency calculation. Further, ITLA does not appear to distinguish between qualified principal residence indebtedness and home loan proceeds used to pay other types of debt. The relevant question, Did you incur the debt in acquiring, constructing, or substantially improving your principal residence? does not permit the taxpayer to respond that only 30 Cancellation of Debt for Field Assistance & SPEC Employees (Oct. 2008). Taxpayers who ask questions that are out of scope are referred to the IRS tollfree numbers, the Internet, or a trained phone assistor. If a qualified assistor is not available, the IRS arranges a callback with a response time of up to 15 days. See I.R.M (Oct. 1, 2008). 31 Cancellation of Debt for Field Assistance & SPEC Employees at 5-20 (Oct. 2008). 32 The glossary contains, among other entries, Insolvency/Solvency which states, in part: You were insolvent immediately before the cancellation to the extent that the total of all your liabilities exceeded the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 45

8 Appendices a portion of the debt was so used. Therefore, the assistor may incorrectly conclude that all (or none) of the taxpayer s canceled debt is excludible from income. 33 For this reason, only IRS employees who receive separate training on cancellation of debt income should use ITLA. Taxpayers who call the IRS toll-free number ( ) to inquire about cancellation of indebtedness issues will speak with a Customer Service Representative who has received training and will use the same interactive ITLA software described above. Moreover, the IRS should add a follow-up question to ITLA inquiring whether the taxpayer used the proceeds for another purpose such as debt consolidation. Continuing Challenges Since the National Taxpayer Advocate s 2007 Annual Report to Congress, the IRS has dealt with several aspects of cancellation of indebtedness that pose difficulties for taxpayers. Particularly with respect to raising awareness of the issue and providing taxpayers with useful information, the IRS has been proactive. However, the difficulty of accurately describing this area of the law in terms that make sense to many taxpayers makes misreporting more likely. Misreporting will not, in many cases, result in an underpayment of tax, yet it may trigger an enforcement action by the IRS. The IRS needs to communicate with taxpayers who do not perfectly account for their cancellation of debt income before resorting to enforcement measures. As Commissioner Shulman has said, the IRS must show sensitivity in dealing with taxpayers buffeted by difficult economic times. 34 Taxpayer Challenges in Reporting Canceled Debts on Form 982 Persist. Taxpayers who exclude cancellation of indebtedness from income are required to report a corresponding reduction in tax attributes by filing Form 982. As described below, the IRS matches this form (and the taxpayer s tax return) with Forms 1099-C issued to the taxpayer to determine whether the taxpayer properly reported cancellation of indebtedness income. Taxpayers who exclude cancellation of debt from income entirely under MFDRA need only reduce their basis in their residence by the amount of the canceled debt. 35 As described above, however, many taxpayers cannot use the MFDRA exception to exclude all of the canceled debt because they used some of the debt proceeds for purposes other than the acquisition, construction, or improvement of their principal residences. These taxpayers may avail themselves of the insolvency exception. Form 982, which is used to claim insolvency, contains a definition of insolvency and an example that illustrates the concept, but the form does not include a worksheet for calculating insolvency, nor does it direct 33 The IRS has indicated that a revised version of the ITLA software will be available on Dec. 5, 2008, which will address these shortcomings in the current application. IRS response to TAS Nov. 21, Martin Vaughan, IRS Head: Tough Economic Times Call for Sensitive Approach, Dow Jones Newswires, Oct. 27, See also Problem, Customer Service within Compliance, infra; Problem, The IRS Needs to More Fully Consider the Impact of Collection Enforcement Actions on Taxpayers Experience Economic Difficulties, infra. 35 Pub. L. No (b); IRS Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments 7 (2007). 46

9 the taxpayer to submit any substantiation of insolvency with the completed Form 982. As described below, this lack of guidance may result in later enforcement action by the IRS. Further, taxpayers who qualify for another exception (such as the insolvency exception) will have to contend with the ordering rules set out in Form 982, which direct them to reduce tax attributes (such as basis, net operating losses, general business credit carryovers, minimum tax credits, and capital losses) in relation to the amount of the canceled debt. Taxpayers who are not farmers or businesses will very likely not have tax attributes other than personal property. Therefore, they will face the requirement of reporting adjustments to personal property such as furniture, jewelry, and clothing. The reduction in basis in personal property will increase the gain on any subsequent disposition of these items or reduce the (nondeductible) loss. Implicit in the logic of this statutory scheme is the supposition: (1) that the taxpayer can establish that he or she has basis in personal property in an amount greater than zero; (2) that the taxpayer who reduces his or her basis in personal property may later sell such personal property; and (3) in the event of such sale the taxpayer will accurately report the gain or (nondeductible) loss, having kept track of the basis in the sold property in the interim. Also implicit in this framework is the supposition that the IRS likewise keeps track of basis in taxpayers personal property as reported on Form 982. In a statutory environment such as this, to say nothing of the economic difficulty the taxpayer is likely facing, the importance of engaging in sensitive, proactive, and helpful communications with taxpayers, especially those whom the IRS identifies as having misreported collection of indebtedness income, is evident. The IRS Is Too Quick to Take Enforcement Measures When Taxpayers Misreport Cancellation of Debt. Taxpayers may first become aware they may need to report cancellation of indebtedness income when they receive a letter, Notice CP 2000, Notice Proposing Adjustments to Income, Payments, or Credits. The IRS issued 126,906 such notices in The Notice CP 2000 is the first step toward assessment of the tax and in this sense is an enforcement measure. The IRS may issue Notice CP 2000 after an AUR analyst evaluates a discrepancy between amounts shown on a Form 1099-C and on the taxpayer s return. It may be issued even if the taxpayer files a Form 982 claiming that he or she was insolvent, if the taxpayer does not also include a statement showing the amount of the insolvency. As described above, Form 982 does not direct the taxpayer to include such a statement. The Notice CP 2000 states that a discrepancy exists and instructs the taxpayer: If you claimed insolvency, please provide us with a breakdown of your total assets and liabilities immediately before the cancellation of debt. 36 IRS response to TAS research request (Oct. 31, 2007); UR TY 2005 Process Code Results Data Extracted 10/27/07, AUR National Rollup for Category 29 (cancellation of debt). Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 47

10 Appendices Therefore, taxpayers who successfully navigate Form 982 and attest to their insolvency may nevertheless find themselves facing an IRS enforcement action when they receive a Notice CP 2000 instructing them to provide a breakdown of their assets and liabilities, without any guidance as to what form the report is to take. The IRS should develop tools and schedules, including an insolvency worksheet, to help taxpayers accurately and completely meet their reporting obligations for cancellation of debt income when they file their tax returns. The IRS Should Create a Single Unit Dedicated to Handling Cancellation of Debt. The complexity of this area of the law, coupled with the frequency of the issue and the expectation, in view of continued economic difficulties, that the number of taxpayers affected by cancellation of debt will grow, warrants the creation of a specialized IRS unit to handle related questions. This approach is not unusual: the IRS set up a specialized unit in 1998 to handle claims for relief from joint liability under newly enacted IRC 6015, 37 and created procedures for accessing the U.S. competent authority in the early 1970s to help taxpayers deal with certain provisions of international tax treaties. 38 Providing more in-depth training to fewer employees would lead to better quality control and consequent improvement in service on a more timely basis (or in real time), consistency in service, and greater ease in spotting and accommodating emerging trends. The centralized unit should be given authority to initiate communications with taxpayers who may have misreported their cancellation of debt income by writing to them at their last known addresses and attempting to ascertain their current addresses. The unit should be responsible for initiating communications that focus on helping taxpayers meet their reporting obligations, rather than establishing that they have not. Conclusion The rules pertaining to cancellation of indebtedness income are complex and, for most taxpayers, counterintuitive. In 2008, the IRS responded to several concerns raised by the National Taxpayer Advocate in her 2007 Annual Report to Congress, but needs to do more to inform taxpayers of the rules and simplify the reporting procedures. The IRS should update the materials it uses to train volunteers who staff the VITA and TCE sites and revise the new ITLA software to verify that it accurately reflects the statutory framework and complements the written training materials. To the extent the IRS requires taxpayers to furnish a breakdown of assets and liabilities in order to claim the insolvency exception, it should provide appropriate forms and instructions, and revise Form 982 to direct taxpayers to provide this information with their returns. The IRS should create a specialized unit to handle cancellation of debt issues. IRS communications to taxpayers who misreport their cancellation of debt should take into account the economic difficulty that these taxpayers are likely facing. By extending the term of MFDRA through 2012, Congress recognized that 37 See IRS Form 8857, Request for Innocent Spouse Relief (1998). 38 See Rev. Proc , C.B

11 the economic distress that leads to debt cancellation is not likely to abate in the next few years. The tax treatment of debt cancellation will therefore require continued attention. IRS Comments As a result of the downturn in the economy and the increasing numbers of taxpayers affected by taxable debt forgiveness income, the IRS has taken, and will continue to take actions to help taxpayers better understand and comply with these very complex provisions of the Internal Revenue Code. Many of these actions were taken in close collaboration with the National Taxpayer Advocate, who timely identified this as an emerging issue and provided the IRS with a number of excellent suggestions. As outlined in more detail below, the IRS developed a new Publication 4681, clarified other related forms, instructions, and publications, and expanded the scope of the services offered at TACs and IRS-sponsored volunteer sites to address this issue. In addition, IRS compliance notices are being revised to reference the Mortgage Forgiveness Debt Relief Act of 2007 and to include the new Publication Finally, as an integral part of the planning for the 2009 filing season, the IRS is developing enhanced communications products, updating and expanding IRS. gov, and increasing outreach to taxpayers, partners, and tax practitioners on this important subject. The IRS developed Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, in collaboration with TAS, to consolidate all relevant information in one document. The publication, which was released in May 2008, provides a thorough explanation of cancellation of debt (COD) issues. The National Taxpayer Advocate recognized this accomplishment by awarding the National Taxpayer Advocate award to IRS employees who worked on the new publication. The IRS, in collaboration with TAS, also revised Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and the instructions to incorporate MFDRA provisions and simplify the task of completing the form for non-business taxpayers. A new table was also added to the instructions on How to Complete the Form, to clearly explain which lines on Form 982 must be completed in situations involving qualified principal residence debt, other non-business debt (such as car loan or credit card debt), and other debts. Although the National Taxpayer Advocate states the revised Form 982 is a substantial improvement over the previous version, she also states taxpayers continue to face challenges in reporting canceled debts on Form 982. Specifically, the National Taxpayer Advocate mentions that Form 982, which is used to claim insolvency, does not include a worksheet for calculating insolvency, nor does it direct taxpayers to submit substantiation of insolvency. The IRS notes that, because of the vast numbers and types of assets and liabilities that can exist for taxpayers, it is impossible to develop a worksheet that would work for all taxpayers. The IRS believes it would be more beneficial to illustrate the calculation through the use of examples, such as those in Publication To this end, the IRS plans to add Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 49

12 Appendices a reference in Form 982 that directs taxpayers to the insolvency examples in Publication Further, the IRS is updating Publication 525, Taxable and Nontaxable Income, to include more specific guidelines on the types of assets and liabilities that must be included in the computation for taxpayers seeking to exclude income based on the insolvency exclusion. With regard to the National Taxpayer Advocate s recommendation that the IRS direct taxpayers to submit substantiation of insolvency with the completed Form 982, the IRS believes this would pose unnecessary burden on those taxpayers since most will not receive a CP 2000 notice from the IRS. The IRS further notes this information is not required during the processing of Form 982, but is normally requested only in connection with resolution of an information return document matching discrepancy, or when a return is selected for examination. With respect to the VITA and TCE programs, the IRS expanded the scope at VITA/TCE sites to include COD issues relating to the MFDRA. Volunteers with advanced certification will be trained to assist taxpayers with tax return preparation for income excluded due to discharge of qualified principal residence indebtedness. A Screening Sheet will be available for volunteers to identify those taxpayers who can be assisted at the volunteer sites and those that need to be referred to TACs or Low Income Taxpayer Clinics. In addition, a training supplement to the 2008 Publication 4491, Volunteer Student Guide, is currently under development. The supplement, Publication 4491-X, will include information about the MFDRA, plus updates on other legislation that have become available since Publication 4491 was published. Two outreach products Publication 4702, Mortgage Forgiveness Debt Relief Act of 2007 Overview, and Publication 4705, Tax Relief for Struggling Homeowners and FAQs are also being updated to provide partners, volunteers, and employees with current information about the MFDRA. With respect to TACs, the IRS has also expanded the scope of return preparation assistance to include COD issues related to MFDRA. Further, for tax law assistance, the IRS removed the out of scope designation and is providing extensive training on COD income for TAC employees who have received Intermediate Tax Law Training. The Interactive Tax Law Assistant (ITLA), an interactive electronic assistance program, will address insolvency, allowing trained assistors to help with a comparison of assets vs. liabilities. 39 Additional probes were added to determine the portion of principal residence indebtedness that was used for a purpose other than acquiring, constructing, or substantially improving the taxpayer s principal residence. The ITLA will also include a resulting response that will address the equity portion of the debt. The IRS agrees that only IRS employees who receive separate training on COD income should use ITLA. Providing high quality service depends on employees knowing when and

13 where to refer issues that are outside their training, certification and expertise. As such, referral procedures are in place to assist taxpayers when an employee encounters a question beyond their training or expertise. Taxpayer issues beyond these levels will be handled through a clearly defined referral process. 40 The National Taxpayer Advocate asserts the IRS is too quick to take enforcement action when taxpayers misreport COD. For example, the National Taxpayer Advocate states taxpayers may first become aware that they may need to report COD income when they receive a letter, Notice CP 2000, Notice Proposing Adjustments to Income, Payments, or Credits. The IRS believes taxpayer s first indication that they need to report COD income more often arises when they receive Form 1099-C, Cancellation of Debt, from the lender. Form 1099-C is required to be filed with the IRS and the taxpayer for cancellation of any debts of $600 or more. However, if the taxpayer fails to include this income on their return or to claim one of the applicable exceptions or exclusions on Form 982, they may receive a CP 2000 notice from the IRS. This notice includes a special paragraph that instructs the taxpayer that under certain conditions, cancelled or forgiven debt should be included on returns as income. This paragraph also informs taxpayers that if they claim insolvency, they should provide a breakdown of total assets and liability immediately before the cancellation of debt. Further, TY 2007 and future CP 2000 notices that involve COD income will include reference to the MFDRA and a copy of Publication For COD cases selected for review by the Automated Underreporter (document matching) Program, if the taxpayer files Form 982 to claim the insolvency exception, a CP 2000 request for substantiation of insolvency is much like any other issue where the IRS is verifying the taxpayer s claim. The practice of requesting additional information from the taxpayer, even though inclusion of that information is not required at the time of filing, is not unique to situations involving COD insolvency status. Finally, the National Taxpayer Advocate recommends the IRS create a single unit dedicated to handling COD issues, similar to the current Innocent Spouse program or the U.S. competent authority procedures created in the early 1970s. It is important to understand that unlike Innocent Spouse or the recently centralized Identity Theft unit, where specialized handling is provided to address unique claims or uncommon issues, the requirement to report and pay tax on COD income is an integral part of IRS information, education, assistance, and compliance operations. In light of current economic conditions, the IRS believes the additional focus and attention to the COD income issue, as outlined above, is fully warranted. However, there are myriad complex provisions in the Code. At this time, the IRS does not believe the COD income issue is so unique as to justify creation of redundant, centralized operations dedicated solely to this particular tax provision. 40 IRM , Referral Procedures. Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 51

14 Appendices Taxpayer Advocate Service Comments The National Taxpayer Advocate applauds the IRS for recognizing the seriousness of this problem and taking appropriate action such as working with TAS to develop Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments; revising Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness; and expanding assistance to taxpayers at TACs and IRS-sponsored volunteer sites. The National Taxpayer Advocate welcomes the IRS s commitment to continue to enhance its training materials and communications products. While the IRS and the National Taxpayer Advocate have worked together very effectively in addressing issues surrounding the problem of understanding and reporting the tax consequences of cancellation of debt income, some challenges remain where the IRS appears not to appreciate the uniqueness and long-term nature of the problem. For example, the IRS believes that a taxpayer first realizes he or she may have cancellation of indebtedness income upon receipt of the Form 1099-C. This assertion simply does not correspond to the realities taxpayers face when their homes are foreclosed, they are evicted, and their former residences sold. Taxpayers in this situation seek alternative living arrangements, such as with friends or family or in shelters, and they may move several times. It should come as no surprise that many taxpayers in this situation do not notify the lender that foreclosed on their home of their current whereabouts in order to ensure that they will receive a form they have never heard of which will permit them to meet a tax reporting obligation that they do not even suspect exists. This is a unique problem, and the IRS should find unique approaches to helping taxpayers understand and report the tax consequences of their debt cancellation. An AUR notice, as the likely first indication taxpayers receive that they may have a tax liability, should be explanatory and helpful, keeping in mind that many taxpayers will not in fact owe additional taxes. The outreach and communications products that the IRS is creating, described in its response, could be included with the initial letter AUR sends. We are unconvinced that the IRS cannot produce an insolvency worksheet for taxpayers to submit with their tax returns when they claim the insolvency exception. The IRS is developing specific guidelines pertaining to insolvency for inclusion in Publication 525, Taxable and Nontaxable Income, which demonstrates that the capability exists. Designing a form with that information (including a line for other assets or liabilities if necessary), providing a general explanation for the form, and referencing Publication 525, would be helpful and appropriate. As another example of the IRS s underestimate of the significance of this issue, the IRS explains that it solicits substantiation from taxpayers claiming the insolvency exception much like any other issue where the IRS is verifying the taxpayer s claim. It is true that the rules pertaining to cancellation of debt income have been in place for many years. As our statistics show, however, entire segments of the population, such as the elderly with 52

15 credit card debt used to pay for medical care, are now affected by these rules for the first time. Middle-class taxpayers whose jobs will be impacted by the economic downturn and the subprime lending spree of recent years will join the ranks of those with debt cancellation reporting obligations. These conditions will transform the problem of cancellation of debt reporting into a taxpayer crisis for the next five years at least. The IRS is short-sighted to resist immediate and fundamental accommodation of this reality. In summary, the National Taxpayer Advocate recommends that the IRS: Develop an insolvency worksheet for taxpayers claiming the insolvency exception; Revise Form 982 to instruct taxpayers claiming the insolvency exception to attach an insolvency worksheet to their returns; and Create a centralized unit dedicated to handling cancellation of debt issues. Taxpayer Advocate Service 2008 Annual Report to Congress Volume One 53

Simplify the Tax Treatment of Cancellation of Debt Income

Simplify the Tax Treatment of Cancellation of Debt Income Appendices Most Serious Simplify the Tax Treatment of Cancellation of Debt Income LR # 6 LR #6 Simplify the Tax Treatment of Cancellation of Debt Income Problem At a time when the government is taking

More information

Taxpayers. What You Should Know. I Found My Voice At The IRS

Taxpayers. What You Should Know. I Found My Voice At The IRS Cancellation Advocating of Debt for Taxpayers What You Should Know I Found My Voice At The IRS National Taxpayer Advocate Podcast Current Law IRS Office of Chief Counsel Cancellation of Debt Section 61(a)(12)

More information

Mortgage Forgiveness Debt Relief Act. Cancellation of Debt (COD) Income. Recourse Loan 10/6/2014. Consequences of the expiration of the act

Mortgage Forgiveness Debt Relief Act. Cancellation of Debt (COD) Income. Recourse Loan 10/6/2014. Consequences of the expiration of the act Mortgage Forgiveness Debt Relief Act Consequences of the expiration of the act Cancellation of Debt (COD) Income When a loan is forgiven without being paid back, COD Income is created. That amount is included

More information

Part 1 Cancellation of Debt Principal Residence. Slide 2 Objectives At the end of this lesson, using the resource materials, you will be able to:

Part 1 Cancellation of Debt Principal Residence. Slide 2 Objectives At the end of this lesson, using the resource materials, you will be able to: Slide 1 Welcome! The Cancellation of Debt lesson is optional specialty training available only on Link & Learn Taxes for volunteers with an Advanced, Military, or International Certification. A separate

More information

Transcript for Canceled Debt (Tax Consequences)

Transcript for Canceled Debt (Tax Consequences) Transcript for Canceled Debt (Tax Consequences) Hello. I m Jean Wetzler, with a reenactment of a March 2009 IRS National Phone Forum on the Tax Consequences of Canceled Debt. The presenter for the phone

More information

Common Foreclosure and Cancellation of Debt Issues for Real Property (edited transcript)

Common Foreclosure and Cancellation of Debt Issues for Real Property (edited transcript) Common Foreclosure and Cancellation of Debt Issues for Real Property (edited transcript) Yvonne McDuffie-Williams: Thank you. As he said, my name is Yvonne McDuffie-Williams. I am a senior program analyst

More information

Cancellation of Debt

Cancellation of Debt Cancellation of Debt The Cancellation of Debt lesson is optional specialty training available only on Link & Learn Taxes for volunteers with an Advanced Certification. A separate certification is required

More information

Real Property: Cancellation of Debt and Foreclosure

Real Property: Cancellation of Debt and Foreclosure Real Property: Cancellation of Debt and Foreclosure Kim Lawson Senior tax analyst Small Business/Self-Employed Division May 16, 2012 The information contained in this presentation is current as of the

More information

TAX CONSEQUENCES OF MORTGAGE MODIFICATIONS

TAX CONSEQUENCES OF MORTGAGE MODIFICATIONS TAX CONSEQUENCES OF MORTGAGE MODIFICATIONS 1 Presenters: Jeff Gentes, Connecticut Fair Housing Center Elizabeth Maresca, Fordham Law School Diane E. Thompson, NCLC CANCELLATION OF DEBT - GENERAL RULES

More information

VITA/TCE Specialty Course Cancellation of Debt (COD) Principal Residence Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE)

VITA/TCE Specialty Course Cancellation of Debt (COD) Principal Residence Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) 5182 VITA/TCE Specialty Course Cancellation of Debt (COD) Principal Residence Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) 2014 COURSE AND TEST Take your VITA/TCE training

More information

4942 VITA/TCE 2013 Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) www.irs.gov Internal Revenue Service

4942 VITA/TCE 2013 Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) www.irs.gov Internal Revenue Service 4942 VITA/TCE Specialty Courses Cancellation of Debt (COD) and Health Savings Accounts (HSAs) Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) 2013 TEST Take your VITA/TCE

More information

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair. AB 99 (Perea) As Amended February 18, 2015 SUSPENSE

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair. AB 99 (Perea) As Amended February 18, 2015 SUSPENSE Page 1 Date of Hearing: May 18, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair 2/3 vote. Urgency. Fiscal committee. AB 99 (Perea) As Amended February 18, 2015 SUSPENSE SUBJECT: Personal

More information

Is Cancellation of Debt Income Taxable? One question that I am asked often these days is whether cancellation of debt (COD) income is taxable or not?

Is Cancellation of Debt Income Taxable? One question that I am asked often these days is whether cancellation of debt (COD) income is taxable or not? Is Cancellation of Debt Income Taxable? One question that I am asked often these days is whether cancellation of debt (COD) income is taxable or not? For tax purposes, the general rule is that all debt

More information

Presented by: David L. Rice, Esq. For CalCPA Pasadena Discussion Group. (c) David L. Rice

Presented by: David L. Rice, Esq. For CalCPA Pasadena Discussion Group. (c) David L. Rice Presented by: David L. Rice, Esq. For CalCPA Pasadena Discussion Group 1 Mortgage defaults and foreclosures are of a national concern. In 2011, nearly 5,000,000 borrowers are behind on their mortgage.

More information

Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)

Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Form 982 (Rev. July 2013) Department of the Treasury Internal Revenue Service Name shown on return Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) OMB No.

More information

Cancelled Debt Remains Issue for Homeowners

Cancelled Debt Remains Issue for Homeowners Cancelled Debt Remains Issue for Homeowners Let s Talk Tax By Brett Hersh, EA, MBA The housing crisis may have dropped from the headlines in recent months. Unfortunately, however, the crisis remains a

More information

Continuing Professional Education

Continuing Professional Education Continuing Professional Education Course Number CPE20908 Revision Date: 11/15/2008 Debt Relief Income & Insolvent Taxpayer Exclusion Learning Objectives After completing this course, the student will be

More information

Copyright 2009-2010 LA First Tax & Financial Services. All Rights Reserved.

Copyright 2009-2010 LA First Tax & Financial Services. All Rights Reserved. Cancellation of Debt Important Terms Foreclosure/ Repossession Forms 1099- A or C Non-recourse Debt Recourse Debt Debt Discharge Income (DDI) Insolvency IRS Tax Provisions Tax Provisions Involved: Emergency

More information

Department of Legislative Services 2014 Session

Department of Legislative Services 2014 Session Senate Bill 596 Budget and Taxation Department of Legislative Services 2014 Session FISCAL AND POLICY NOTE Revised (Senator Peters, et al.) SB 596 Ways and Means Income Tax Subtraction Modification - Mortgage

More information

Department of Legislative Services 2012 Session

Department of Legislative Services 2012 Session House Bill 600 Ways and Means Department of Legislative Services 2012 Session FISCAL AND POLICY NOTE Revised (Delegate Zucker, et al.) HB 600 Budget and Taxation Income Tax - Subtraction Modification -

More information

ANALYSIS OF ORIGINAL BILL

ANALYSIS OF ORIGINAL BILL Franchise Tax Board ANALYSIS OF ORIGINAL BILL Author: Harkey Analyst: Scott McFarlane Bill Number: AB 2358 Related Bills: See Legislative History Telephone: 845-6075 Introduced Date: February 21, 2014

More information

RETURN PREPARATION: Require the IRS to Provide Return Preparation to Taxpayers in Taxpayer Assistance Centers and Via Virtual Service Delivery

RETURN PREPARATION: Require the IRS to Provide Return Preparation to Taxpayers in Taxpayer Assistance Centers and Via Virtual Service Delivery LR #3 RETURN PREPARATION: Require the IRS to Provide Return Preparation to Taxpayers in Taxpayer Assistance Centers and Via Virtual Service Delivery PROBLEM Beginning in the 2014 filing season, the IRS

More information

SPECIAL ALERT: MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 BRINGS TAX CHANGES TO REAL ESTATE

SPECIAL ALERT: MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 BRINGS TAX CHANGES TO REAL ESTATE SPECIAL ALERT: MORTGAGE FORGIVENESS DEBT RELIEF ACT OF 2007 BRINGS TAX CHANGES TO REAL ESTATE By Patricia Hughes Mills, J.D., L.L.M. Associate Professor of Clinical Accounting University of Southern California

More information

Foreclosures on the Rise

Foreclosures on the Rise That Pesky COD Karen Brosi, EA, CFP Foreclosures 2 1 Foreclosures on the Rise Top 4 states at Sep 30, 2009: Nevada Arizona California Florida 2.5 million properties p received default notice first 9 months

More information

WORKING OUT AND RESTRUCTURING DISTRESSED DEBT TAX TRAPS AND TECHNIQUES TO ACHIEVE FAVORABLE OUTCOMES

WORKING OUT AND RESTRUCTURING DISTRESSED DEBT TAX TRAPS AND TECHNIQUES TO ACHIEVE FAVORABLE OUTCOMES WORKING OUT AND RESTRUCTURING DISTRESSED DEBT TAX TRAPS AND TECHNIQUES TO ACHIEVE FAVORABLE OUTCOMES State Bar of Wisconsin Annual Convention May 6, 2009 Richard A. Latta Michael Best & Friedrich LLP One

More information

The 1099- C, Insolvency, and the Cancellation of Debt: What you Need to Know

The 1099- C, Insolvency, and the Cancellation of Debt: What you Need to Know Moving Your Practice in the Right Direction TM The 1099- C, Insolvency, and the Cancellation of Debt: What you Need to Know A Practice Essentials Presentation 2010 OnePath Practice Management Advisors,

More information

ANALYSIS OF AMENDED BILL

ANALYSIS OF AMENDED BILL Franchise Tax Board ANALYSIS OF AMENDED BILL Author: Perea Analyst: Scott McFarlane Bill Number: AB 99 Related Bills: See Legislative History Telephone: 845-6075 Introduced Date: Amended Date: Attorney:

More information

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms.

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms. Attention: This form is provided for informational purposes only. Copy A appears in red, similar to the official IRS form. Do not file copy A downloaded from this website. The official printed version

More information

Page 1 of 9 Home > Legal > Tax Folder > Taxation of Foreclosures and Short Sales Taxation of Foreclosures and Short Sales find the article at: "http://www.car.org/legal/taxfolder/taxation-foreclosures-shortsales/"

More information

FORECLOSURE TAXATION

FORECLOSURE TAXATION FORECLOSURE TAXATION Phil Rosenkranz Attorney At Law Legal Aid Society of Milwaukee 521 North 8th Street Milwaukee, Wisconsin 53233 (414) 727-5300 (414) 291-5488 (fax) prosenkranz@lasmilwaukee.com Sean

More information

Department of Legislative Services 2014 Session

Department of Legislative Services 2014 Session Department of Legislative Services 2014 Session HB 264 House Bill 264 Ways and Means FISCAL AND POLICY NOTE (Delegate Luedtke) Budget and Taxation Income Tax - Subtraction Modification - Student Loan Debt

More information

Insolvency Procedures under Section 108

Insolvency Procedures under Section 108 Income Tax Insolvency Insights Insolvency Procedures under Section 108 Irina Borushko and Urmi Sampat In the current prolonged recession, many industrial and commercial entities have had to restructure

More information

Petitioner, Craig Curley, filed a petition for redetermination of a deficiency or for refund

Petitioner, Craig Curley, filed a petition for redetermination of a deficiency or for refund STATE OF NEW YORK DIVISION OF TAX APPEALS In the Matter of the Petition : of : CRAIG CURLEY : DETERMINATION DTA NO. 825923 for Redetermination of a Deficiency or for Refund of New : York State and New

More information

Mortgage Forgiveness Debt Relief Act of 2007 Reduces Negative Tax Consequences from Foreclosures

Mortgage Forgiveness Debt Relief Act of 2007 Reduces Negative Tax Consequences from Foreclosures Mortgage Forgiveness Debt Relief Act of 2007 Reduces Negative Tax Consequences from Foreclosures APRIL 2008 - During the recent U.S. real estate boom, some lending institutions abandoned all caution. Lending

More information

GAO TAX ADMINISTRATION. Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven Mortgage Debt

GAO TAX ADMINISTRATION. Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven Mortgage Debt GAO United States Government Accountability Office Report to Congressional Requesters August 2010 TAX ADMINISTRATION Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven

More information

House Bill 640 Ways and Means - State Tax Consequences

House Bill 640 Ways and Means - State Tax Consequences House Bill 640 Ways and Means Department of Legislative Services 2012 Session FISCAL AND POLICY NOTE Revised (Delegate Serafini, et al.) HB 640 Budget and Taxation Income Tax - Subtraction Modification

More information

CANCELLATION OF DEBT(COD) Applicable Entities COD. Informational Return. Identifiable Event. IRC Sec. 6050P:

CANCELLATION OF DEBT(COD) Applicable Entities COD. Informational Return. Identifiable Event. IRC Sec. 6050P: Tax Consequences of Foreclosure Philip J. Rosenkranz Staff Attorney Tax Consequences in Foreclosure Two distinct taxable Events: 1.Cancellation of debt 2. Gain or loss The Legal Aid Society of Milwaukee,

More information

Canceled Debts, Foreclosures, Repossessions, and Abandonments

Canceled Debts, Foreclosures, Repossessions, and Abandonments Department of the Treasury Internal Revenue Service Publication 4681 Cat. No. 51508F Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals) For use in preparing 2013 Returns Contents

More information

Florida Foreclosure/Real Estate Law. E-Book. A Simple Guide to Florida Foreclosure/Real Estate Law. by: Florida Law Advisers, P.A.

Florida Foreclosure/Real Estate Law. E-Book. A Simple Guide to Florida Foreclosure/Real Estate Law. by: Florida Law Advisers, P.A. Florida Foreclosure/Real Estate Law E-Book A Simple Guide to Florida Foreclosure/Real Estate Law by: Florida Law Advisers, P.A. 1 Call: 800-990-7763 Web: www.floridalegaladvice.com TABLE OF CONTENTS INTRODUCTION...

More information

Common Tax Issues in a Down Economy, IRS Red Flags & Transactions in Property

Common Tax Issues in a Down Economy, IRS Red Flags & Transactions in Property Common Tax Issues in a Down Economy, IRS Red Flags & Transactions in Property Pedram Ben-Cohen Attorney & CPA BEN-COHEN LAW FIRM 1801 Avenue of the Stars, Suite 1025 Los Angeles, CA 90067-5809 Direct Dial:

More information

FARM LEGAL SERIES June 2015 Tax Considerations in Liquidations and Reorganizations

FARM LEGAL SERIES June 2015 Tax Considerations in Liquidations and Reorganizations Agricultural Business Management FARM LEGAL SERIES June 2015 Tax Considerations in Liquidations and Reorganizations Phillip L. Kunkel, Jeffrey A. Peterson, S. Scott Wick Attorneys, Gray Plant Mooty INTRODUCTION

More information

REAL ESTATE DEBT OUTS ) AND FORECLOSURES: SELECTED TAX CONSEQUENCES

REAL ESTATE DEBT OUTS ) AND FORECLOSURES: SELECTED TAX CONSEQUENCES REAL ESTATE DEBT RESTRUCTURING ( WORK- OUTS ) AND FORECLOSURES: SELECTED TAX CONSEQUENCES Presented by Robert Falb Robert Honigman Arent Fox LLP Washington, DC New York, NY Los Angeles, CA October 15 and

More information

Automated Collection System (ACS)

Automated Collection System (ACS) Automated Collection System (ACS) 245 Designed by IRS to streamline it s unpaid account collection, however: Tax practitioners struggle with many of it s organization concepts Inability to contact previous

More information

IMPACT. Taxpayer implications of an Economic Downturn TAX IMPLICATIONS

IMPACT. Taxpayer implications of an Economic Downturn TAX IMPLICATIONS TAX IMPLICATIONS IMPACT Taxpayer implications of an Economic Downturn By Joseph LiPari, CPA, M.B.A. As the United States continues to be mired in its worst recession in 80 years, we are all well aware

More information

REAL ESTATE PROPERTY FORECLOSURE and CANCELLATION OF DEBT AUDIT TECHNIQUE GUIDE

REAL ESTATE PROPERTY FORECLOSURE and CANCELLATION OF DEBT AUDIT TECHNIQUE GUIDE REAL ESTATE PROPERTY FORECLOSURE and CANCELLATION OF DEBT AUDIT TECHNIQUE GUIDE NOTE: This document is not an official pronouncement of the law or the position of the Service and cannot be used, cited,

More information

Cancellation of Debt A Special Focus on Home Foreclosures

Cancellation of Debt A Special Focus on Home Foreclosures Cancellation of Debt A Special Focus on Home Foreclosures Mary M. Gillum, Coordinator and Attorney Tennessee Taxpayer Project Legal Aid Society of Middle Tennessee and the Cumberlands (Graphics from Microsoft

More information

Apple Federal Credit Union. Reporting Delinquent Matters and 1099-A and 1099-C Presentation 2014

Apple Federal Credit Union. Reporting Delinquent Matters and 1099-A and 1099-C Presentation 2014 Apple Federal Credit Union Reporting Delinquent Matters and 1099-A and 1099-C Presentation 2014 Discussion Topics Reporting Delinquent Matters 1099 Overview 1099-A 1009-C IRS Position on 1099-C Bankruptcy

More information

Analysis of the Proposed Tax Exclusion for Canceled Mortgage Debt Income

Analysis of the Proposed Tax Exclusion for Canceled Mortgage Debt Income Order Code RL34212 Analysis of the Proposed Tax Exclusion for Canceled Mortgage Debt Income October 16, 2007 Pamela J. Jackson Specialist in Public Finance Government Finance Division Erika Lunder Legislative

More information

DISCHARGE OF INDEBTEDNESS INCOME PLANNING OPPORTUNITIES

DISCHARGE OF INDEBTEDNESS INCOME PLANNING OPPORTUNITIES DISCHARGE OF INDEBTEDNESS INCOME PLANNING OPPORTUNITIES Thomas Mammarella Gordon, Fournaris & Mammarella, P.A. 1925 Lovering Avenue Wilmington, DE 19806 Tel: (302) 652-2900 Fax: (302) 652-1142 tmammarella@gfmlaw.com

More information

When the IRS StRIkeS How to Get out of a Bind

When the IRS StRIkeS How to Get out of a Bind Representing Non-Filers How Not to Lose Your EA License Vol.29 No.5 When the IRS StRIkeS How to Get out of a Bind Turning a Practice into a Business Member Resource Guide President s Message Capitol Corner

More information

DEALING WITH THE BANKRUPT PROPERTY OWNER BY HARRY CHARLES AUGUST 22, 2008 & AUGUST 28, 2008

DEALING WITH THE BANKRUPT PROPERTY OWNER BY HARRY CHARLES AUGUST 22, 2008 & AUGUST 28, 2008 DEALING WITH THE BANKRUPT PROPERTY OWNER BY HARRY CHARLES AUGUST 22, 2008 & AUGUST 28, 2008 FORECLOSURE: ISSUES, TRENDS AND PERSPECTIVES IN COMMERCIAL LAW MOBAR CLE 1. What is foreclosure for tax purposes?

More information

Cancellation of Debt

Cancellation of Debt Cancellation of Debt ROBERT E. MCKENZIE Arnstein & Lehr LLP Arnstein & Lehr LLP 1 Debt Cancellation If a debt is canceled or forgiven, other than as a gift or bequest, the debtor generally must include

More information

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Many Taxpayers Are Still Not Complying With Noncash Charitable Contribution Reporting Requirements December 20, 2012 Reference Number: 2013-40-009 This

More information

Q: Will I have to pay federal taxes on the money my lender loses in the short sale?

Q: Will I have to pay federal taxes on the money my lender loses in the short sale? Q: What is a Short Sale? Answer: In a short sale, the lender agrees to settle the debt owed on the property for less than the full amount. Settled means that the lender is writing off the debt (which is

More information

Federal Income Taxation Chapter 7 Receipt Subject to Offsetting Liability

Federal Income Taxation Chapter 7 Receipt Subject to Offsetting Liability Presentation: Federal Income Taxation Chapter 7 Receipt Subject to Offsetting Liability Professors Wells September 21, 2015 Transactions with Borrowed Funds p.437 No income realized upon the receipt of

More information

Bank Giveth - Section 1001 Gain and COD Income

Bank Giveth - Section 1001 Gain and COD Income What the Bank Giveth, the IRS May (Partially) Take Away An Introduction to the Tax Aspects of Workouts February 17, 2009 By: Gregory R. Wilson Many individual and business taxpayers are currently struggling

More information

Home Mortgage Interest Deduction

Home Mortgage Interest Deduction Department of the Treasury Internal Revenue Service Publication 936 Cat.. 10426G Home Mortgage Interest Deduction For use in preparing 1998 Returns Contents Introduction... 1 Part I: Home Mortgage Interest...

More information

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms.

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms. Attention: This form is provided for informational purposes only. Copy A appears in red, similar to the official IRS form. Do not file copy A with the IRS. The official printed version of this IRS form

More information

10.0 AT-RISK LIMITATIONS

10.0 AT-RISK LIMITATIONS Page 1 of 21 Table of Contents 10.0 AT-RISK LIMITATIONS 10.1 General Overview IRC 465, R&TC 17551, and R&TC 24691 10.2 Amount At-Risk 10.3 Contributions of Cash or Other Property 10.4 Contributions of

More information

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms.

Attention: See IRS Publications 1141, 1167, 1179 and other IRS resources for information about printing these tax forms. Attention: This form is provided for informational purposes only. Copy A appears in red, similar to the official IRS form. Do not file copy A downloaded from this website. The official printed version

More information

Tax Relief for Businesses in Distress American Bar Association Section of Taxation

Tax Relief for Businesses in Distress American Bar Association Section of Taxation Tax Relief for Businesses in Distress American Bar Association Section of Taxation 5-Year Carryback of 2008 and 2009 Net Operating Losses (NOLs) for Eligible Small Businesses (ESBs) For 2008 and 2009,

More information

Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program

Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program : Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program : Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program Table of Contents Executive

More information

Debt Modifications: Tax Planning Options Including New 10-Year Potential Deferral Ann Galligan Kelley, Providence College, USA

Debt Modifications: Tax Planning Options Including New 10-Year Potential Deferral Ann Galligan Kelley, Providence College, USA Debt Modifications: Tax Planning Options Including New 10-Year Potential Deferral Ann Galligan Kelley, Providence College, USA ABSTRACT With the recent decline in the real estate market, many taxpayers,

More information

Special Report: IRS Tax Lien

Special Report: IRS Tax Lien Special Report: IRS Tax Lien TAX PLANNING AND IRS DEFENSE C a l l T o d a y! 540-438- 5344 What an IRS Tax Lien is and How it Works What is Inside? Why the IRS Files a Notice of Federal Tax Lien IRS Tax

More information

Income Tax Planning for Commercial Real Estate Debt Restructuring

Income Tax Planning for Commercial Real Estate Debt Restructuring Bankruptcy Planning Insights Income Tax Planning for Commercial Real Estate Debt Restructuring Robert F. Reilly, CPA Many industry observers forecast a continued downturn in the commercial real estate

More information

NH&RA Fall Developers Forum October 18-19, 2010 A Few Things to Remember About Debt Restructuring

NH&RA Fall Developers Forum October 18-19, 2010 A Few Things to Remember About Debt Restructuring NH&RA Fall Developers Forum October 18-19, 2010 A Few Things to Remember About Debt Restructuring Forrest Milder, Nixon Peabody LLP Roger Yorkshaitis, Gatehouse Group, Inc., Overview -- 1 The cancellation

More information

What is a Short Sale?

What is a Short Sale? What is a Short Sale? A Short Sale is used to describe the sale of a home in which the homeowner owes the bank more than the home is worth. The bank agrees to allow the home to be sold for less than what

More information

ADDITIONAL TOPICS. Glenn Gizzi. Fall/Winter 2013

ADDITIONAL TOPICS. Glenn Gizzi. Fall/Winter 2013 ADDITIONAL TOPICS Glenn Gizzi Fall/Winter 2013 Registered Tax Return Preparer Program Jan. 18, 2013 U.S District Court enjoined the IRS from enforcing the regulatory requirements for registered tax return

More information

Real Estate Accounting Potpourri. Presented by: Jason Thompson Kimberly Brown and Stephanie Onzay

Real Estate Accounting Potpourri. Presented by: Jason Thompson Kimberly Brown and Stephanie Onzay Real Estate Accounting Potpourri Presented by: Jason Thompson Kimberly Brown and Stephanie Onzay Tax Consequences of Debt Discharge & Foreclosure Rules Outline Tax consequences of forgiven debt if: Insolvent

More information

CONSUMER BANKRUPTCY. Q: What is bankruptcy? Q: How does someone know whether to file a Chapter 7 or 13? Q: How is an action filed in bankruptcy court?

CONSUMER BANKRUPTCY. Q: What is bankruptcy? Q: How does someone know whether to file a Chapter 7 or 13? Q: How is an action filed in bankruptcy court? CONSUMER BANKRUPTCY R. Michael Drose * Thomas M. Fryar * Ann U. Bell * Certified Bankruptcy Specialist Q: What is bankruptcy? A: Bankruptcy laws are federal laws and are the same in every state, although

More information

Leveraging New IRS Rules Eliminating 36-Month Testing Period for Cancellation of Debt Income

Leveraging New IRS Rules Eliminating 36-Month Testing Period for Cancellation of Debt Income Leveraging New IRS Rules Eliminating 36-Month Testing Period for Cancellation of Debt Income MONDAY, DECEMBER 15, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit

More information

Tax Issues for Bankruptcy & Insolvency

Tax Issues for Bankruptcy & Insolvency Tax Issues for Bankruptcy & Insolvency By David S. De Jong, Esquire, CPA Stein, Sperling, Bennett, De Jong, Driscoll & Greenfeig, PC 25 West Middle Lane Rockville, Maryland 20850 301-838-3204 ddejong@steinsperling.com

More information

Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP

Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP 1. Cost Segregation Study What is a cost segregation study and how is it done? What is the IRS position on cost segregation?

More information

The Evolution of Taxation of Split Dollar Life Insurance. by Christopher D. Scott. I. Introduction

The Evolution of Taxation of Split Dollar Life Insurance. by Christopher D. Scott. I. Introduction The Evolution of Taxation of Split Dollar Life Insurance by Christopher D. Scott I. Introduction The federal government recently published final regulations and issued a revenue ruling that changes the

More information

4491X. VITA/TCE Training Supplement. Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE)

4491X. VITA/TCE Training Supplement. Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) 4491X VITA/TCE Training Supplement Volunteer Income Tax Assistance (VITA) / Tax Counseling for the Elderly (TCE) 2014 Returns Take your VITA/TCE training online at www.irs.gov (keyword: Link & Learn Taxes).

More information

CONSUMER. Steps That Advocates Can Take To Help Prevent Foreclosure

CONSUMER. Steps That Advocates Can Take To Help Prevent Foreclosure CONSUMER Information for Advocates Representing Older Adults National Consumer Law Center Steps That Advocates Can Take To Help Prevent Foreclosure How Foreclosures Work CONCERNS Foreclosure or the threat

More information

This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other

This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other This publication is distributed with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional advice and assume no liability in connection with

More information

Cleveland State University Cleveland-Marshall College of Law

Cleveland State University Cleveland-Marshall College of Law Cleveland State University Cleveland-Marshall College of Law Statement of Deborah A. Geier Professor of Law, Cleveland-Marshall College of Law, Cleveland State University Before the Senate Committee on

More information

The Top Seven Financial Pitfalls Every Homeowner Facing Foreclosure Must Avoid

The Top Seven Financial Pitfalls Every Homeowner Facing Foreclosure Must Avoid The Top Seven Financial Pitfalls Every Homeowner Facing Foreclosure Must Avoid The foreclosure process is perplexing, even for those experienced in real estate. Real estate agents, attorneys, mortgage

More information

Most Litigated Issues

Most Litigated Issues Most Serious Appendices MSP #7 HARDSHIP LEVIES: Four Years After the Tax Court s Holding in Vinatieri V. Commissioner, the IRS Continues to Levy on Taxpayers it Acknowledges are in Economic Hardship and

More information

Don t get caught short in a declining market

Don t get caught short in a declining market February 2009 Don t get caught short in a declining market In a thriving home-sale market, employers who have home-sale programs for their transferees rarely encounter terms such as short sale, loss on

More information

26 CFR 1.121-1: Exclusion of gain from sale or exchange of a principal residence. (Also: 61, 165, 691, 1001; 1.61-6, 1.165-1, 1.691(a)-1, 1.1001-1.

26 CFR 1.121-1: Exclusion of gain from sale or exchange of a principal residence. (Also: 61, 165, 691, 1001; 1.61-6, 1.165-1, 1.691(a)-1, 1.1001-1. Section 121. Exclusion of gain from sale of principal residence 26 CFR 1.121-1: Exclusion of gain from sale or exchange of a principal residence. (Also: 61, 165, 691, 1001; 1.61-6, 1.165-1, 1.691(a)-1,

More information

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Direct Debit Installment Agreement Procedures Addressing Taxpayer Defaults Can Be Improved February 5, 2016 Reference Number: 2016-30-011 This report has

More information

WHY THE EXPIRATION OF THE MORTGAGE DEBT FORGIVENESS ACT RARELY APPLIES TO ARIZONA SHORT SALES 1

WHY THE EXPIRATION OF THE MORTGAGE DEBT FORGIVENESS ACT RARELY APPLIES TO ARIZONA SHORT SALES 1 WHY THE EXPIRATION OF THE MORTGAGE DEBT FORGIVENESS ACT RARELY APPLIES TO ARIZONA SHORT SALES 1 After years of extensions to the Mortgage Debt Forgiveness Relief Act, this act will expire at the end of

More information

General Rules 1. All income is taxable.

General Rules 1. All income is taxable. Chapter 17 Pages 239-252 General Rules 1. All income is taxable. p. 239 2. Cancelled debt is income. 3. Cancelled debt is taxable: a. To a solvent taxpayer. b. To the extent solvency is restored. Warning!

More information

Treatment of COD Income by Partnerships

Treatment of COD Income by Partnerships Treatment of COD Income by Partnerships Stafford Presentation January 28, 2015 Polsinelli PC. In California, Polsinelli LLP Allocation of COD Income COD income is allocated to those partners who are partners

More information

IMPACT. November/December 2011. Watch out for tax bills delivered COD. Lending to or borrowing from your company the right way

IMPACT. November/December 2011. Watch out for tax bills delivered COD. Lending to or borrowing from your company the right way tax November/December 2011 IMPACT Tax treatment of debt forgiveness Watch out for tax bills delivered COD Lending to or borrowing from your company the right way Why jointly owned property may not be a

More information

TAXPAYER RIGHTS ACT OF 2015: SECTION-BY-SECTION SUMMARY

TAXPAYER RIGHTS ACT OF 2015: SECTION-BY-SECTION SUMMARY TAXPAYER RIGHTS ACT OF 2015: SECTION-BY-SECTION SUMMARY TAXPAYER RIGHTS Section 101. Statement of Taxpayer Rights. Section 101 requires the Secretary of the Treasury to publish a Taxpayer Bill of Rights

More information

Consumer Credit Counseling. Knowing Your Options A Briefing for Individuals Contemplating Bankruptcy

Consumer Credit Counseling. Knowing Your Options A Briefing for Individuals Contemplating Bankruptcy Consumer Credit Counseling Knowing Your Options A Briefing for Individuals Contemplating Bankruptcy Part 1 Overview You are contemplating bankruptcy and probably have a number of questions. Is bankruptcy

More information

Planning. Taxation of loan forgiveness. Today s Plan 8/19/2014

Planning. Taxation of loan forgiveness. Today s Plan 8/19/2014 Planning Comprehensive Student Loan Training Series Session Three of Four August 2014 Above the line adjustments to income Take the student loan deduction Use health savings account from employer Use section

More information

Instructions for Forms 1099-A and 1099-C

Instructions for Forms 1099-A and 1099-C 2016 Instructions for Forms 1099-A and 1099-C Department of the Treasury Internal Revenue Service Acquisition or Abandonment of Secured Property and Cancellation of Debt Section references are to the Internal

More information

Early Delinquency Intervention: Saving Your Home From Foreclosure

Early Delinquency Intervention: Saving Your Home From Foreclosure Early Delinquency Intervention: Saving Your Home From Foreclosure There are many circumstances in a homeowner s life that could result in missed mortgage payments: unexpected expenses, loss of overtime,

More information

BEFORE THE TAX COMMISSION OF THE STATE OF IDAHO ) ) ) ) ) ) ) ) ) PROCEDURAL BACKGROUND

BEFORE THE TAX COMMISSION OF THE STATE OF IDAHO ) ) ) ) ) ) ) ) ) PROCEDURAL BACKGROUND BEFORE THE TAX COMMISSION OF THE STATE OF IDAHO In the Matter of the Protest of, Petitioners. DOCKET NO. 20644 DECISION PROCEDURAL BACKGROUND On August 3, 2007, the Income Tax Audit Division of the Idaho

More information

BANKRUPTCY WHAT IS BANKRUPTCY?

BANKRUPTCY WHAT IS BANKRUPTCY? BANKRUPTCY Most military personnel and their families handle their financial affairs in a responsible and timely manner. Those who have problems usually seek timely assistance from financial counselors.

More information

Getting the Jump on Year-End Tax Planning Ideas for Individuals

Getting the Jump on Year-End Tax Planning Ideas for Individuals Getting the Jump on Year-End Tax Planning Ideas for Individuals Broadcast Date: Sept. 26, 2012 Copyright 2012 All-Star Tax Series, LLC 3.8% Medicare Surtax As applied to individuals, tax is 3.8% of lesser

More information

Foreclosures, Repossessions, and Cancelled Debt

Foreclosures, Repossessions, and Cancelled Debt CPE/CE 4 Credit Hours Foreclosures, Repossessions, and Cancelled Debt Help Clients Get Back on Their Feet 2014 Tax Year Interactive Self-Study CPE/CE Course Foreclosures, Repossessions, and Cancelled Debt

More information

NEVADA S RECOMMENDATIONS

NEVADA S RECOMMENDATIONS www.faceofforeclosure.com/nevada Recommendation 1: Amend AB 284 from 211 Session AB 284 from the 211 Session established a standard of care by which trustees in foreclosure sales must follow prior to foreclosing

More information

CONSIDERING FILING FOR BANKRUPTCY? KNOW THE ALTERNATIVES FIRST A Different Route to Resolve Debt May Be a Better Choice

CONSIDERING FILING FOR BANKRUPTCY? KNOW THE ALTERNATIVES FIRST A Different Route to Resolve Debt May Be a Better Choice CONSIDERING FILING FOR BANKRUPTCY? KNOW THE ALTERNATIVES FIRST A Different Route to Resolve Debt May Be a Better Choice ENGLEWOOD, COLORADO For some Americans facing a seemingly insurmountable level of

More information

IMPACT. November/December 2011. Watch out for tax bills delivered COD. Lending to or borrowing from your company the right way

IMPACT. November/December 2011. Watch out for tax bills delivered COD. Lending to or borrowing from your company the right way tax November/December 2011 IMPACT Tax treatment of debt forgiveness Watch out for tax bills delivered COD Lending to or borrowing from your company the right way Why jointly owned property may not be a

More information

no--asset 7 s asset 7 s

no--asset 7 s asset 7 s Bankruptcy Questions Answered! Attorney to Non- Attorney Robert McKenzie, EA, Esq. Types of Bankruptcies This is not an easy subject, but our goal is to distill it to key issues you need to know as a return

More information